Case Toshiba was formed in 1939 through a merger between hibaura Engineering Works and Tokyo Electric Company, and subsequently pioneered the development of electrical equipment in Japan. Prior to World War II, Toshiba developed the rst uorescent lamps and radar in Japan and had ambitions to become one of the world's leading electrical machinery manufacturers. In the favourable Post-war climate, Toshiba's nancial status was secure. The company rst listed its shares on the Tokyo Stock Exchange in 1949 and went on to produce Japan's rst broadcasting equipment in 1952, launched Japan 's rst digital computers in 1954, and developed Japan 's rst microwave ovens in 1959. Despite these technical and marketing successes, the company resisted the adoption of modern business policiesits executives adhered to a feudal system of hierarchy and status. By 2000, Toshiba had become the world's fourth-largest chip manufacturer and third-largest notebook computer manufacturer. By then the company was organized into six divisions. Information & Communications and Industrial Systems was the largest division, accounting for 30 percent of sales. Digital Media and Electronic Devices & Components were two divisions that each accounted for over 20 percent of sales. Power Systems and Home Appliances each accounted for approximately 10 percent of sales. Smaller product lines comprised the sixth division, which accounted for the remaining sales. Shortly thereafter, the company refocused its corporate strategy to place greater emphasis on building nuclear power plants, which was expected to be driven primarily by increased demand in China and the United States. In 2005, when British Nuclear Fuels put its US. power plant division Westinghouse Electric Company up for sale, Toshiba was so eager to be the winning bidder that it paid $5.4 billion, which was about three times the seller's projected sales price. Toshiba anticipated that it would install 45 new nuclear reactors worldwide by 2030. Declining oil prices, emergence of alternative energy sources such as solar and wind, and the 2008 global nancial crisis wreaked havoc on Toshiba's growth strategy in the nuclear power plant industry. Indeed, Toshiba and all of Japan 's economy suffered during 2008 and 2009 in what was the deepest recession in post-war Japan. The country's gross domestic product fell by 9 percent. An increase in foreign demand coupled with large government stimulus packages led to recovery of most of the lost output by mid-2010. Toshiba seemed to be sharing in this rebound. But then, on the afternoon of March 1 1, 2011, all of Japan suffered yet another horric setback. A magnitude 9.1 earthquake northeast of Tokyo set off a tsunami with waves up to 128 feet striking the Japanese coast. Nearly 20,000 people lost their lives, and direct material damage was estimated at 25 trillion, approximately four times the damage caused by Hurricane Sandy. The damage to Japan's infrastructure was so severe that all 54 of the country 's nuclear reactors were taken ofine. By mid-2018, only nine were back online. Following the tsunami, China temporarily froze nuclear plant approvals and revised downward its projection of nuclear energy capacity by 2020. In the United States, plans to build 12 power plants were cancelled or suspended, and construction was stopped at two plants. The worldwide response to the tsunami dealt a massive blow to Toshiba's expansion strategy for its nuclear power division. The disaster caused a 2.6 percent decline in Japan's gross domestic product in the rst half of 201 1. A rebound in the second half of 2011 gave way to yet another recession in mid-2012. Toshiba's performance during this period as measured by net sales and net income attributable to common shareholders is detailed in Table 1. These economic events and circumstances placed significant pressure on Toshiba's executive officers, whose compensation packages depended heavily on meeting short-term performance targets. At the executive monthly meetings between Toshiba's CEO and division heads, the CEO set income targets, called "challenges," for each division. These targets emphasized the current period's sales and profits and often were so aggressive as to exceed the capabilities of the divisions. Yet Toshiba's CEO suggested that the "challenges" needed to be achieved, and sometimes implied that underperforming divisions would be sold or liquidated. The pressure imposed by the CEO filtered down from the division heads to the middle managers and employees. While the CEO did not explicitly instruct that fraud be committed, he apparently relied on the Japanese corporate culture of obedience and loyalty that led employees to do whatever was necessary to meet these targets. The Japanese cultural value of unquestioned obedience was reinforced by the lack of job rotation of key personnel in the Accounting and Finance Division at Toshiba. Most employees worked in the same division from hiring date until retirement. The resulting sense of camaraderie made it difficult for an employee to correct or question an inappropriate accounting treatment. Furthermore, the corporate-level internal audit function (called the Corporate Audit Division) reported to Toshiba's CEO and served primarily in a consulting role to management. Although the corporate internal auditors recommended improvements in controls that would have prevented or detected inappropriate accounting treatments, they did not recommend changes to the actual accounting. Company executives prepared improvement plans in response to the audit findings, but those plans were never executed. In Japanese corporate governance, the board of directors emphasizes its operational executive function over its supervisory/stewardship function. Many directors ascend to the board from the employee ranks after years of service. Consequently, most board members know the company and the employees intimately and their allegiances are to people inside the company. Further, their mental attitude tends toward the pursuit of company interest rather than personal gain. Japanese boards tended to be large, consisted mostly of middle-aged Japanese men, and had few outside directors. These boards did not conduct business through a committee structure, which is a hallmark of Western companies. Only in 2003 were the three committees-the audit committee, nominating committee, and compensation committee- introduced to harmonize the Japanese system with the Western system. Toshiba, along with Sony, Hitachi, and Nomura, were leaders in adopting these corporate governance reforms. While Toshiba had an audit committee, it was headed by a former Toshiba CFO, Mr. Muraoka from 2011 to 2014, who was then succeeded by yet another former CFO, Mr. Kubo, beginning in 2014. The audit committee included three independent directors, but these directors had limited knowledge of accounting. Also, the staff assigned to support the work of the audit committee possessed inadequate accounting expertise. Ernst & Young ShinNihon had audited Toshiba for 60 years. During the years relevant to the case, Toshiba followed U.S. GAAP for financial reporting purposes and was audited under Japanese auditing standards. In Japan, auditors are paid hourly rates that are lower than in other advanced industrialized countries (Khondaker and Bremer 2016, 92). This is partly due to the fact that Japan once imposed limits on audit fees. For FY 2014, Toshiba paid 1982 million (about $8 million) as audit fees to EY. This was about 0.015 percent of Toshiba's revenue, whereas comparably sized U.S. firms pay, on average, four times as much. Against this backdrop, Toshiba embarked on a seven-year fraud commencing in 2008. The multi-dimensional fraud involved a variety of transactions at four divisions, and inflated cumulative profits by V150 billion